Bank of Canada Rates Might be on Hold Due to Slowing Inflation Rate

In September this year Canada’s consumer price index slowed to 2%, thus bringing the yearly rate of increase at a comfortable level for the policymakers.

“They can say they’ve done their job. Their target for inflation has basically been right on target. So they don’t really feel the need to change anything abruptly,” says Douglas Porter, chief economist at BMO Capital Markets.

The Bank of Canada’s trendsetting interest rate will remain at 1%.

For Governor Stephen Poloz the toughest part would be to keep an even-footed policy position as his party waits for the international economy to pick up.

The last monetary policy report released in July had shown concerns over “weaker-than-expected job markets. And now I think it shifts to the uncertainty overseas and the market volatility. Although they won’t specifically point to volatility, I think they’ll talk more about the global growth risks as the main reason why they need to keep policy relatively easy,” says Porter.

The risks include the big recession in the Euro zone, with Germany being the worst hit and other countries contemplating deflation. Added to that is Japan’s struggling economy and a slowdown even in the world’s second largest economy, China.

Previously, the Bank of Canada had predicted a 2.2% growth for Canada’s economy this year and 2.4% in 2015. However, there have been signs of weakness. “The BoC expressed some cautious optimism on exports. However, as we pointed out in the past and also confirmed by the recent trade data, the improvement could prove unsustainable,” says Charles St-Arnaud, economist at Nomura Securities, London.

According to Statistics Canada, the September decline in consumer price index to 2% followed an August reading of 2.1%, which has been the highest in the past two and a half years. The consumer price index had increased by 0.2% last month following a 0.1% increase in August. These readings fell within the range of forecasts made by economists.

The reading for core inflation (this does not include key volatile items like certain food and energy products) was at 2.1% in September, same as the previous month.

According to Bill Adams, senior international economist at PNS Financial Service, Canada’s CPI report is perfectly normal. “Inflation is back on target, with faster food price increases offsetting a decline in gasoline prices; service price increases are modestly overshooting the Bank of Canada’s inflation target and compensating for the decline in energy prices,” he says.

“On another week, the insight of this report would be that expectations for Canadian monetary policy should remain unchanged with a rate hike likely in July 2015. If anything, the pickup in service price inflation in the last two CPI reports suggests that an earlier than expected rate hike is a remote but growing possibility,” he said.